Trump addresses new balance of burdens

Why the US will restructure its debt

by Joergen Oerstroem Moeller in Singapore

Thu 10 May 2018

Pundits have long seen President Donald Trump as a loose cannon. This is a mistaken interpretation. He knows what he is doing and is clear in his goals. Revoking the Iran deal, for example, has been part of his long-held mantra. No matter how much other countries may deplore it, no one can say they didn't see it coming. Internationally Trump wishes to modify significantly the global system set up by the US and Britain after the second world war.

Trump's aim is not to take the US out of the global economy, but to improve his country's terms of engagement. The post-war system worked well because the US was by far the strongest economy and conducted a benign foreign and security policy.

Until 1990 Washington led an alliance of countries defending free market principles, which the Soviet Union appeared to threaten. The Soviet collapse means this value-based alliance no longer exists. Trump's Washington is reluctant to export its model to other countries, and they are increasingly reluctant to adopt it.

The 2008 financial crisis sowed in US citizens distrust in their own political model, making them less willing to pay for a global role. Simultaneously, the US share of the international economy has fallen to 22% from around 32% in 2000. The same trend is visible in US trade and global investment.

The balance between burdens and benefits has shifted against the US. Trump is pursuing the same general policy that any other president would: reduce burdens and ask for more benefits to bring the balance in line with today's global economy. The rest of the world finds such a seminal shift difficult to accept, but for many US politicians and much of the electorate it is long overdue.

The trade issues are merely skirmishes. The battle will come when it becomes unsustainable for the US to service its sovereign debt, which may happen sooner than most would care to think. In less than four years the share of net interest burden will jump to 16% from 9.4% of the federal budget. International capital markets may lose confidence in the US after having financed deficits on the current account since the early 1980s combined with federal deficits since the 1960s.

In such circumstances one option is to offer creditors higher yields, as is happening as the US Federal Reserve raises interest rates. This course has considerable disadvantages. The net interest burden will climb higher. Consumer credit and borrowing costs for businesses will rise, making investments less profitable. The result will be diminished growth. This is anathema to US politicians. Creditors would suffer as lower demand suppresses exports to the US and the country becomes less able to repay debt.

The way out is to restructure US debt, with the US and its creditors agreeing on a new payments schedule. The net interest burden will be lower, interest rates will rise (less quickly) and US growth will not fall quite so dramatically. For the principal creditors, China and Japan, rescheduling payments is a minor inconvenience compared to a major US slowdown. And for Beijing in particular, it would signal a decline in US power, elevating China's global standing.

Such a debt restructuring would reflect a necessary realignment of Washington's global commitments and burdens. Such a policy would be unpalatable to many, but may represent the least worse of a series of unpleasant options. As the world's largest economy, combined with its political influence and ability to project power, the US will get what it wants, one way or another.

Joergen Oerstroem Moeller is Senior Research Fellow, ISEAS Yusof Ishak Institute, and a former State Secretary at the Danish foreign ministry. This is the first in a series of two articles on US policy and the restructuring of its sovereign debt. The second article will be published tomorrow.